Notes From Underground: What goes down must come up, spinning wheel got to go round

Okay, a new month arrives. Where November went out like a lamb, December roared like a lion. The equity markets across the globe put on a stellar performance as the ECB was rumored to have reversed course and began buying the BONDS of the peripheral European nations. The amount purchased was unknown but whatever the total it was enough turn around the damage done on Monday and Tuesday. German BUNDS were sold and Italian, Irish, Portuguese and Spanish were bought, but the Greeks barely moved. Spanish bonds were 18 basis points lower; Italy, 15; Ireland, 29; and Portugal, 30bp lower. The newfound support for PIIGS’ debt was enough to lift the gloom that has weighed upon EQUITY at least for a day.

Thursday the ECB reports its rate decision followed by a Trichet press conference. It is doubtful that the Europeans will move rates but it will be more important to hear if the ECB is going to embark on a quantitative ease program similar to the FED. The chances of a program in magnitude similar to the FED are doubtful. It will be interesting to hear if Trichet and his cronies have heard the markets and attempt to be proactive. It is important to recall the Duisenberg dictum that has ruled the ECB since its inception: “WE HEAR BUT WE DO NOT LISTEN.”

Later in the morning the markets will hear from Axel Weber, president of the Bundesbank and ECB executive board member. Lately, Weber has softened his stance on the European Financial Stability Facility as he seems to have accepted the fact that it is better for the EFSF to continue buying sovereign debt rather than face the possible demise of the EURO and all of misery that may cause to Europe as a whole. Germany has been the intransigent one on any type of real European QE program so his speech takes on a new dimension. (The speech is at 9 a.m. CST.)

Tonight there is word that the EFSF has decided to issue its first EUROPEAN BONDS in a move to raise capital for emergency funding as the BONDS are to be guaranteed by 16 European nations and will be priced to yield 50 to 90 basis points over German BUNDS. It is rumored that Asian buyers are lining up for these European notes as they are a good credit with an extra kicker over BUNDS. Klaus Regling, head of the EFSF, was in Singapore on a trip to secure buyers. The BUNDS may have been sold off as these new BONDS will replace some BUNDS in global bond portfolios. Also, in  the U.S. bailout news, the FED revealed that European banks were major recipients of the FED‘s special funding programs. The FED cannot turn its back on Europe as the world’s financial system is so very interconnected and today’s news was more proof of that symbiotic relationship.

Now that we’ve had European debt problems to digest, the markets will have a look at the jobless claims as a prelude to Friday’s unemployment report. Last week there was a significant drop in claims and the consensus is for a small upward move to 425,000. I am going out on a limb and suggesting that the claims number is going to be under 400,000 and that will light up the news boards. A drop under that number will be equity-positive and lead to anticipation of a robust number on Friday. If the jobs situation improves and U.S. BOND rates move higher, it will be important to see how the FED reacts. Will Bernanke and company be complacent to allow long rates to move up as equities rise as it would be the confirmation of the Jackson Hole Portfolio Balance Channel?

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6 Responses to “Notes From Underground: What goes down must come up, spinning wheel got to go round”

  1. Danny Says:


    Would you agree or disagree that QE by the ECB may actually turn out to be constructive for the EU periphery countries? A decent QE program by the ECB might be just the ticket to ending or at the very least stemming the feedback loop on fiscal finances for several of the countries in distress. By contrast in the US, the Fed QE program and objectives seem doomed to have a rather limited impact on the real economy, via faulty design for accomplishing their stated task at hand i.e. stimulus based on loose theoretical reaction functions thought to exist by “rational” participants willingness to take on new risks faced with no better alternative.

    On Russia, when you evaluate an investment like Russia…do you tend to focus on general indexes or drill down into what few Russian ADR’s exist or actual Russian listed companies? Or do you stick with currencies, commodities, etc? Additionally, Russia’s political and economic fate is inextricably linked to commodity prices. As commodity prices rise they can and will continue expanding and opening up their economy (which will AT SOME POINT lead to them being as great a place to do business as any other). However, when commodity prices decline Russia’s political/economic climate can become so tenuous that they tend to float back up the left side of Ian Bremmer’s “J Curve” (a.k.a. become more authoritarian which is needless to say less friendly to capital-however so slightly). Thus, to take a stance on Russia is to hold some sort of inherent stance on commodity prices…so what is your take?

    As always thanks for your time.


  2. Fred E. Says:

    ” I am going out on a limb and suggesting that the claims number is going to be under 400,000 and that will light up the news boards.”

    Of course the markets will have a very short term fillip if you’re right, but frankly I haven’t paid much attention to these monthly numbers in recent periods which I beieve are managed.lSeasonal adjustments, Birth/Death adjustment etc. leaves a lot to the managers. The QE is not the only place where intervention is taking place. In short, much coming out of the BLS (including the hedonistic CPI) makes me leave out the middle letter of that agency.

  3. yra Says:

    Fred –you are too cynical to live in new York—but I don’t disagree with the premise.The only thing is that as atrader that is all I have to work with so I must utilize the data to the best of my ability—over time the fed is right that all fundamentals will get smoothed out but not on my time line

  4. Ben Says:

    I know you’ve mentioned Richard Koo in the past. I came across a provocative piece by him suggesting the market’s recent indigestion was a result of potentially lighter QE rather then Euro-debt based. I am a little skeptical of this interpretation but would love to hear your thoughts because if true it has huge implications…

  5. yra Says:

    Danny–the Russian story is definitely a commodity story but most certainly much more.The wealth generated by natural resources is vast but Russia can be much more with a very well educated populace and its vast military technology infrastructure.I think you have to look at all the things you mentioned —stocks,interst rates ,inflation rates and mosr certainly the rule of law.Is Russia a vast sea of corruption–yes but every emerging market has a group that lives in the shadows—robber barons in the the U.S. ring a bell.I am not saying that Russia is easy and I said it will be a story for 2011 and yes I am aware that Russia has seen its largest capital outflows in maybe forever –and yet the currency has not really weakened lately.Interesting about the move PEPSI made today–but as promised I will follow this story

  6. yra Says:

    Ben–Richard Koo is certainly a thoughtful and insightful economist and more importantly a political economist.I disagree with him somewhat about the Bernanke piece in the Wash Post as I blogged that he seemed to throw down the gauntlet to the surplus,export based economies.He was adamant that they structurally change or the impact of QE2 and a weaker dollar would force them to change.He also restated the Jackson Hole thoughts on aset reallocation.Now the DOLLAR is rallying because of European stress and confusion as well as foreign investors being underweight U.S. equities but Europe has definitely been a problem.Koo is correct though that the cause and effect is not linear as there are many variables in play at the same time.The FED may back off the QE in the shadow of Warsh but if rates back up too far and effect the Equity markets I think the FED will get aggressive in buying debt;as long as it is only portfolio rebalancing effecting long term rates the FED can hold its fire.

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